The recent world market declines were gifts to some international value and value/growth managers, who are now capitalizing - or expect to when the dust settles.
For them, the markets' October tumult offers a rare buy-low moment.
"For us, this has been a buying opportunity, particularly in Japan and Southeast Asia. And Latin America looks interesting for a long-term value investor like us," said Glenn Carlson, managing partner with Brandes Investment Partners, San Diego.
The bottom-up manager found attractive shares in such places as Brazil, Korea, Thailand and Singapore, and "there is still more buying to do." Some stocks, Mr. Carlson explained, are selling at a deep discount to their book value. And some yields were proving to be greater than the companies' price-earnings ratio.
For its part, Templeton Investment Counsel Inc., Fort Lauderdale, Fla., has been a net buyer of stocks, "but that is not unusual for us," pointed out President Donald Reed. Templeton "tends to find more bargains in declining markets than advancing ones . . . (And) we're actively doing our research to make sure the bargains we find will be suitable going forward," he said.
Several other managers said they were selectively nibbling as stocks they had been eyeing came down in price, or were stepping up their research on stocks hit by the downdrafts.
But some managers - seeing the woolly investment climate right now - are biding their time. Some of them see clearer opportunities ahead, once markets become calmer and stocks can be reassessed.
As James Clunie, investment manager of Murray Johnstone International, Glasgow, Scotland, explained last week: "Intraday stock moves lately have been all over the place." According to one broker's calculation, volatility in Hong Kong's market two weeks ago was in off-the-charts territory. "You were statistically more likely to be abducted by aliens than to see the amount of volatility that actually occurred in Hong Kong's market," said Mr. Clunie.
Murray Johnstone believes the current climate does not offer a clear buying opportunity. It is holding its 5% cash weighting as ammunition in case good opportunities surface. Recently it sold the stock of an unnamed British company with sizable exporting exposure to Asia and bought shares of Overseas Union Bank in Singapore, said Mr. Clunie.
Edinburgh Fund Managers, Edinburgh, Scotland, is focusing on market research and analysis right now, but not stock buying, said Richard Muckart, investment director. He said the reason is a lack of attractive opportunities.
Mr. Muckart recently spent two weeks in Asia visiting 30 companies, but made no stock purchases there or additions to existing holdings. To him, there was "nothing to get excited about for the short-term in Asia."
Mr. Muckart uses value, momentum and growth-at-the-right-price criteria for choosing investments. Thus, although some markets and stocks were clearly pummeled, market momentum hasn't yet "turned the corner to a buy signal" for him.
Nonetheless, he - and a number of other managers - clearly welcome the air-clearing market declines that seemed to bring some markets closer to true value.
But the whole sobering process seems to have reinforced the need to keep a sharp and continuing eye on fundamentals.
As Thomas White, president of Thomas White Asset Management Ltd., Chicago, put it: "Anybody who (invests on the basis of) unrealistic returns can (expect to be) disappointed."
Older tenets ring true
For some investors, market declines underscored some older market tenets that seemed to have gotten lost in the frothy 1990s: that markets shouldn't be expected to rise continually. And "irrational exuberance" may indeed have taken hold.
Thus, the downturns were a welcome development for Edinburgh's Mr. Muckart. They "made people realize that markets don't go up forever. Nothing is a given; you have to have some basis for making purchases and have to have a criteria for selling when it's appropriate to do so," he said.
Thomas Tull, managing director, Gulfstream Global Investors, Dallas, elaborated on the theme. "Whether you're a stock picker, growth manager or value manager, these stocks are worth only so much," he pointed out. If a stock reaches a multiple of, say, 50, investors need to ask if they can make money at that lofty level. In most cases, the answer is no, he said.
Important to be realistic
He believes people have to be more realistic in what they pay for stocks. "In our approach, we buy positions that are 1.5% to 2% of our portfolios. When the positions get to 4%, we start to prune," said Mr. Tull.
In the past few weeks, the realistic pricing lesson was among those that came to the fore - and in fact is still keeping some investors out of the markets.
But that wasn't the only lesson taken home.
To Mr. Carlson of Brandes Investment, the market's gyrations also brought another message: a plug for active managers, of which he is one. In his view, events showed the efficient market hypothesis - that stocks and markets are correctly priced - has "substantial weaknesses, and that emotion, rather than rationality, still runs stock markets short-term.
"The efficient market theory tells you that active management doesn't make sense, that you can't beat the market," he said.
But that wasn't the lesson learned from Hong Kong's plunge, he added.
"Business prospects didn't change 40% for Hong Kong companies over a three- and six-month period," he said, even though that market's index fell roughly that much from 1997's peak to trough.
For Mr. Carlson, the lesson simply put is: "Markets continue to be run on emotion, and long-term investors should take advantage of short-term volatility."